Mortgage: The Key Points that You Should Know

A mortgage is an agreement in which a borrower pledges their house as collateral to secure a loan. Essentially, it is a written promise to repay the debt. Mortgages come with terms and interest rates that can be either adjustable or fixed.

Mortgage Terms

Mortgages are structured so they can be repaid in instalments over a specified period. This period, known as the term, can be 10, 15, or even 30 years. The length of the term influences the amount to be repaid, which is spread across the instalments.

Mortgage Interest Rate

The interest rate is the percentage charged on the mortgage loan amount. Interest rates vary based on the borrower’s credit score. A higher credit score typically results in lower interest rates and monthly payments, whereas a lower credit score leads to higher interest rates and payments. Therefore, maintaining a good credit score can help secure more favourable terms.

Types of Mortgages

Adjustable-Rate Mortgages (ARMs)

In ARMs, the interest rate changes periodically based on market fluctuations. The degree of change is tied to an index, which may vary, such as being linked to a foreign bank rate. It is important to understand which index the adjustable rate is tied to. Generally, the interest rate is fixed for the first 1-5 years and then becomes adjustable.

Fixed-Rate Mortgages

With fixed-rate mortgages, the interest rate remains constant throughout the term, regardless of market changes. This means the borrower will not have to pay more than the agreed-upon rate. The only way to change a fixed-rate mortgage is through refinancing.

Refinancing

Refinancing involves modifying the terms of an existing mortgage agreement. Borrowers may refinance to take advantage of lower interest rates, thereby saving money. Refinancing can also alter the term length, either shortening or extending it. However, it is important to consider that refinancing incurs new closing costs and fees.

Appraisal

Appraisal is a critical aspect of the mortgage process. Before obtaining a loan, the house's value must be accurately assessed. An appraiser evaluates the house by inspecting its features and comparing it to neighbouring properties. Any enhancements to the house can increase its value, but the new value must be documented through a reappraisal.